India Introduces Draft Climate Finance Taxonomy

The Union Budget Speech for FY 2024-25 had first proposed formation of a climate finance taxonomy, following which the Ministry of Finance has now introduced a draft Framework for India’s Climate Finance Taxonomy, for public consultation.

Let’s take it from the top!

What exactly is a taxonomy and what purpose does it serve?

In the context of climate finance, a taxonomy is a classification system that defines what kind of projects, activities, technologies or measures are climate-aligned. It is a useful tool for investors to make investments in ventures that our aligned to well-defined standards on climate.

India has committed to reach Net Zero (emissions) by 2070 and defined its Nationally Determined Contributions (NDCs) towards climate management. Achieving this requires massive investment. It is estimated that India requires around US$ 250 billion per year till 2047 to support its energy transition. A further US$ 206 billion (at 2014-15 prices) is required from 2015 to 2030 to implement climate adaptation actions (to protect against climate catastrophes) in agriculture, forestry and allied eco systems. This scale of investment necessitates a strong taxonomy that ensures funding is received only by projects that meet certain requirements/ definitions, thereby increasing effectiveness and avoiding greenwashing.

Approach adopted

A taxonomy is generally prepared in two parts – qualitative and quantitative. The exposition of the objectives and principles that guide the identification of activities and projects as being climate-relevant forms the qualitative part, while the quantitative aspect is reflected in the form of performance thresholds like the expected extent of GHG savings, best-in-class performance, and improvements in emission intensity.

The issued draft follows a similar structure by first laying down the qualitative aspects or the ‘Framework’ of the taxonomy. After adoption of this Framework, detailed ‘Sectoral Annexures’ will be issued to cover sector-specific, quantitative definitions.

Classification System

The draft broadly covers three climate areas – climate mitigation, climate adoption (both classified under ‘Climate Supportive’ activities) and climate transition (classified under ‘Transition Supportive’ activities).

The below table summarises the constituent elements of each of these categories:

It should be noted that Tier 1 Climate Supportive category majorly supports those projects that provide absolute emission avoidance/ reduction and build climate resilience, while Tier 2 Climate Supportive category is more focused on efficiency improvements with focus on emission intensity. Further, transition activities are strictly defined and permitted only in areas where emission avoidance technology in unavailable or unviable. This incentivises companies to aim for Climate Supportive activities in the first place.

Sectors covered

The taxonomy currently applies to the following sectors:

• Power, Mobility, and Buildings, in the context of climate mitigation and adaptation co-benefits.

• Agriculture, food and water security, in the context of climate adaptation and resilience building.

• Two hard-to-abate sectors - Iron and Steel and Cement, in the context of transition activities.

These sectors have been chosen basis their contribution to overall greenhouse gas emissions (or susceptibility to risk in case of resilience building) and their impending role in Viksit Bharat. The government through this selection intends to incentivise these critical sectors to grow in a way that supports the dual agenda of development and climate management.

Eight founding Principles

Lastly, the draft identifies eight principles as fundamental wireframe for the activities identified under the Framework. They are as follows:

1. Consistency with India’s stated position on climate action (and NDCs) and development priorities (@Viksit Bharat)

2. Do no significant harm to other objectives of the climate finance taxonomy (yet to be defined safeguards, likely to cover human rights issues)

3. Focusing on sectoral pathways and trajectories in the India context

4. Interoperability and consistency with other international frameworks and taxonomies

5. Support Transition Activities, to facilitate investment in hard-to-abate sectors

6. Promoting the use of Indigenous technologies

7. Be science-based and transparent, relying on defined and scientific methodologies and metrics

8. Proportionality criteria to support MSMEs

Final Comments

The draft Taxonomy is a positive step forward, incentivising meaningful investments in not just climate mitigation but also in often ignored areas of climate adaptation and transition. The draft is contextual to the Indian economy and builds inclusivity through provisions for MSMEs and indigenous technologies. The choice of sectors too ensures inclusion of industries that are most critical to India’s climate journey.

We await more details on ‘Do no significant harm’ safeguards, detailed sectoral annexures and guidance on interoperability with international frameworks such as the EU and ASEAN taxonomies, which will ultimately define the effectiveness of this framework.

We would love to hear your feedback in the comments section below or at info@esgityadvisors.com.

Image Source: IndiaTV